Formulas or Supervision? Remarks on the Future of Regulatory Capital

[...]This paper focuses on the relative emphasis thatthe structure of regulatory capital places on formulas andon supervision. The two are not viewed as mutually exclusive,but as elements to which capital policy implicitlyassigns relative weights. We will see that in U.S. regulatorypractice, these weights have shifted over time, notalways in the same direction. Furthermore, we will explorethe relationships among regulatory formulas, supervisoryappraisals, and the prevailing business practices in thebanking industry.1 We then ask, what is the appropriatemix of formulas and supervision?[...]